What is the Impact of Fintech Charters on Community Banks and Credit Unions?

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On July 31, 2018 the Office of the Comptroller of the Currency (OCC) announced the approval of the national fintech charter. This announcement followed the Treasury Department’s report about how non-banks, like fintechs, should be regulated. The OCC’s decision is based on government efforts to promote economic growth, and support innovation that improves financial services to customers, businesses and communities.

“The federal banking system must continue to evolve and embrace innovation to meet the changing customer needs and serve as a source of strength for the nation’s economy,” said Comptroller of the Currency Joseph M. Otting. “The decision to consider applications for special purpose national bank charters from innovative companies helps provide more choices to consumers and businesses, and creates greater opportunity for companies that want to provide banking services in America. Companies that provide banking services in innovative ways deserve the opportunity to pursue that business on a national scale as a federally chartered, regulated bank.”

According to the OCC, qualifying fintechs are granted a special purpose charter, but they must comply with the rules and regulations that other nationally chartered institutions follow. However, fintech companies can still choose to seek out state banking charters, appropriate business licenses and partnerships with other state and federal institutions.

If you’d like to learn more about the specifics of the charter, the OCC listed details on their website.

What does this mean for community banks and credit unions?

Industry experts are saying that there is no immediate threat to banks and credit unions. I’ve narrowed it down to the following four reasons:

1. Fintechs will face more scrutiny

One of the pros to the fintechs seeking out a special purpose charter from the OCC is that it allows them to bypass state money transmitter and lending laws, but they have to comply with the laws and regulations that are imposed upon other nationally chartered institutions. The OCC will supervise fintechs similarly to banks when it comes to risk management, capital and liquidity. Fintechs are opening themselves to more scrutiny by choosing to operate under the OCC, and it can often be a more difficult process than it is worth depending on the type, size and business model of the qualifying fintechs.

2. Chartered fintechs cannot collect deposits

One of the biggest drawbacks for chartered fintechs is that they cannot collect deposits. Being able to take deposits is a core function of a bank or credit union. Under the OCC’s special purpose charter, institutions cannot take deposits, or be insured by regulators like the FDIC. Newly chartered fintechs are not a threat to community banks and credit unions because fintechs are more likely to partner with a depository institution than compete directly against one for this specific service.

3. Fintechs don’t want to be banks

Experts predict that very few fintechs are going to jump at the opportunity to be regulated by the OCC because they don’t want to be banks. Fintechs offer specific services for a reason. The exceptions are fintechs that provide lending or payment services, because under a charter they don’t have to get multiple state licenses to operate at a national level, and they can bypass state money transmitter and lending laws. However, it is important to recognize that P2P fintechs like Zelle have already chosen to partner with banks instead of chartering.

4. Fintechs want to reach national markets

Though it seems unlikely, if fintechs become a threat under this new charter, it is speculated that it will impact national banks more than community banks and credit unions. Industry thought leaders believe the fintechs that qualify for a special purpose charter are large enough to create direct competition with national banks, not community banks and credit unions. The customer of a community bank or credit union is very different, focused on reaching a community level, not the national level that fintechs would want to reach.

Though it does not look as though fintechs with charters will be an immediate threat, there are two things banks and credit unions should do to remain competitive in the industry.

1. Be open to digital transformation

In this day and age where technology is rapidly changing the way people use financial services, it is important for banks and credit unions to be adaptable and incorporate new technology into their service offerings to meet customer needs and expectations.